Accounting Concepts and Principles

1. Basic Accounting Concepts

 Going Concern or Continuity Assumption – The financial statements of a business are prepared with
the assumption that the business will continue operating normally and indefinitely, with no plans to shut
down or reduce its operations.
 Entity Concept or Accounting Entity Assumption - The entity concept in accounting means that a
business is treated as separate from its owners or other businesses, and its transactions are recorded
independently.
 Periodicity Concept or Time Period Assumption - An entity’s operations are divided into equal time
periods, usually one year, for reporting purposes. This practice allows regular financial reporting, which
helps maintain transparency and good relationships, especially in partnerships.
 Monetary Unit Assumption - Business transactions are recorded using a common unit of measurement
—the peso—so they can be objectively measured, organized, and analyzed more systematically in
financial statements.

Monetary unit assumption has two aspects, namely:

Quantifiability – meant that assets, liabilities, capital, income and expenses be stated in terms of
a unit of measure which is the Philippine peso.
Stability of Peso – means we treat the peso’s value as constant, even if prices slightly change
over time.

 Stable Monetary Unit Concept or Monetary Value – The Philippine Peso is used in accounting
because its value is considered stable, so the effects of inflation are usually ignored in financial records
 Matching Principle – This concept states that income and related expenses should be recorded in the
same period to properly measure business performance.
Basis for Time Period
 Calendar Year – a one year period that starts at January 1 and ends at December 31.
 Fiscal Year – a one year period that start at any day except January 1 and ends after a year at the same
day. (ex. January 23, 2021 to January 23, 2022).
 Interim Period – a period which comprise less than one business year.

Basic Accounting Principles:

 Objectivity Principle - Accounting uses the most reliable and verifiable data to ensure records and
statements are accurate and useful.
 Historical Cost Principle - This principle states that acquired asset should be recorded at their actual cost
and not at what management thinks they are worth as at reporting date.
 Adequate Disclosure – Requires that all relevant information that would affect the users understand and
assessment of the accounting entity be disclosed in the financial statements.
 Materiality – Materiality in accounting means that only information that is important enough to influence
decisions should be included in financial statements. If leaving out or misstating a piece of information
could change how someone views the company’s finances or decisions, then that information is material.
 Consistency Principle - The firms should use the same accounting method from period to period to
achieve comparability over time within a single enterprise. However, changes are permitted if justifiable
and disclosed in the financial statements.
  Revenue Recognition Principle – Revenue is to be recognized in the accounting period when goods are
delivered or services are rendered or performed.
 Expense Recognition Principle – Expenses should be recognized in the accounting period in which
goods and services are used up to produce revenue and not when the entity pays for those goods and
services.

2. Accounting Standards

What are Accounting Standards?

 They are official rules and guidelines on how to record and report business transactions.
 In the Philippines, we use Philippine Financial Reporting Standards (PRFS) and Philippine Accounting
Standards (PAS).
 These are aligned with IFRS (International Financial Reporting Standards).

Why are they Important?

 Ensure consistency across companies.
 Help financial statements be understandable, reliable, and comparable.
 Serve as a guide for accountants to handle various business situations properly.

Standard Description
PAS 1 – Presentation of Financial Statements How financial statements should look and what they must
include.
PAS 2 – Inventories How to value and record goods held for sale (inventories).
PAS 16 – Property, Plant, and Equipment How to account for fixed assets like buildings, machines,
etc.
PFRS 15 – Revenue from Contracts When and how to recognize income or sales.
PFRS 16 – Leases Rules for accounting rented properties or equipment
PFRS for Small Entities A simpler version of standards made for small businesses.

3. The Conceptual Framework for Financial Reporting

Basic Purpose of Conceptual Framework:

 Assist the FRSC in developing accounting standards that will represent Philippine GAAP.
 Assist preparers of FS in applying accounting standards and in dealing with issues not yet covered by
GAAP.
 Assist the FRSC in its review and adoption of IFRS.
 Assist users of FS in interpreting the information contained in the FS.
 Assist auditors in forming an opinion as to whether FS conforms to Philippine GAAP.
 To provide information to those interested in the work of FRSC in the formulation of PFRS.

NOTE: Conceptual Framework is not a PFRS. Nothing in this framework overrides any specific PFRS. In case of
conflict, the requirement of PFRS prevails.

Scope of Conceptual Framework:

1. Concepts of capital and capital maintenance
2. Objective of Financial Reporting
3. Qualitative Characteristics that determine the usefulness of information in Financial Statement
4. Elements of Financial Statement
Qualitative Characteristics:
These are qualities or attributes that makes the accounting information useful to the users. These are classified
into two types, Fundamental and Enhancing Qualitative Characteristics.

Fundamental Qualitative Characteristics:

 Relevance – means the information can affect a user's decision because it helps them understand the past,
present, or future of the business.
Ingredients of Relevance:
Predictive Value – when it can help users increase the likelihood of correctly or accurately
predicting or forecasting the information.
Confirmatory Value – when it enables users to confirm or correct earlier expectations.
NOTE: The relevance of information is affected by its nature and materiality.

 Faithful Representation – It means that financial reports should accurately show what really happened
in the business, using clear words and correct numbers. The transactions and their effects must be
truthfully and properly reflected in the financial statements.

Ingredients of Faithful Representation:

Completeness - All important and relevant information must be included in the financial
statements to ensure users fully understand the situation. Nothing should be left out that could
affect a user's understanding or lead to wrong conclusions. This follows the principle of full
disclosure.
Neutrality – Financial information should be presented fairly and without bias. It must not be
prepared in a way that favors one group (like management or investors) over another. The goal is
to ensure honest and balanced reporting.
Free from Error – The information must be accurate, with no mistakes or missing details. The
methods used to record and report data must also be correct and applied properly, so the results
truly reflect what happened.
Substance over Form – Transactions should be recorded based on their true nature and economic reality,
not just their legal form. This means financial statements must show what really happened, not just what
the legal documents say. This idea is part of ensuring faithful representation in accounting.

Enhancing Qualitative Characteristics:

It relates to the presentation of the financial information.
 Verifiability – Financial information is verifiable when independent and knowledgeable people can look
at the same data and reach similar conclusions. This is possible when the information is supported by
objective evidence, ensuring it is reliable and not just based on opinion.
 Comparability – Comparability means financial information can be used to identify similarities and
differences across time (within the same business) or between different businesses. This is achieved when
the same accounting methods are applied consistently.
  Understandability – Financial information should be clearly presented so that users, who are expected to
have basic knowledge of accounting and business, can understand it. The goal is to make the information
useful without oversimplifying important details.
 Timeliness – Financial information must be provided early enough to influence decisions. Even if the
data is accurate and relevant, it loses its usefulness if it's given after decisions have already been made.
Accounting Constraints:
The factor that may affect the relevance and reliability of financial accounting information is cost benefit
principle – the benefit derived from information should exceed the cost incurred in obtaining the information.